The Week Ahead: City awaits updates from groups including BP, Barclays, GlaxoSmithKline, Diageo, Rolls Royce and Thomas Cook
THE reporting season gathers pace this week with some of the UK’s biggest companies due to unveil their annual figures, including oil giant BP, banking group Barclays and the country’s largest pharmaceutical firm GlaxoSmithKline.
Hopes have been raised that BP’s fourth quarter results on Tuesday will include its first dividend increase since the Gulf of Mexico oil spill.
Shares are just 2% lower than a year ago and have recovered 31% since the 2011-low in September as oil prices remained close to the 100 US dollars a barrel mark and optimism surrounding its recovery following the fatal Deepwater Horizon explosion improved.
City analysts currently forecast a fourth-quarter dividend of 8 US cents a share, up from 7 cents paid in the previous quarter, which will be watched closely as it accounts for one pound in every six invested by pension schemes.
However, the supermajor’s earnings are expected to have come under pressure in the final three months of the year as its refining business suffers from squeezed margins and its production levels come down amid further disposals.
And the oil spill recovery efforts were dealt a blow last week when a US federal judge said BP must uphold a clause in its contract with well partner Transocean that would protect the driller from compensation claims related to the disaster.
However, the judge left open the possibility that Transocean might still have to pay all or part of any punitive damages and civil penalties imposed by the U.S. government. A trial to apportion blame was set for February 27 in New Orleans.
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The FTSE 100 listed company is forecast to report clean replacement cost profit of 7.7 billion US dollars (�4.9 billion) in the fourth quarter, compared with 7.5 billion US dollars (�4.7 billion) the previous year.
This comes as production dips from 3.6 million barrels of oil a day to 3.45 million barrels a day. The group was producing more than 4 million barrels a day before the disaster.
Keith Bowman, equity analyst at Hargreaves Lansdown Stockbrokers, said: “Petroleum product prices, particularly in the US, are likely to have been outpaced by increasing crude oil costs. The mild winter weather may also have hindered gas operations.”
Chief executive Bob Dudley will be put on the spot once again as he is expected to reveal an updated strategic plan for the company, which is still striving to overcome the damage done to its reputation following the oil spill in April 2010.
It has already set aside 41 billion US dollars (25.6 billion) for the clean-up and other possible associated costs.
However, it previously said payments into the trust fund, set up after former chief executive Tony Hayward was brought to task by President Barack Obama, will be completed early following a recent four billion US dollar (�2.5 billion) settlement with Macondo well partner Anadarko.
Mr Dudley ran into fierce criticism himself following the failure of a share swap and Arctic exploration deal with Rosneft.
The row over bankers’ pay will reignite once again on Friday when Barclays kicks off the industry’s annual results season amid reports boss Bob Diamond could pocket up to �10 million.
The chief executive, who was once dubbed the unacceptable face of banking by former business secretary Lord Mandelson, could reportedly receive a share award worth as much as seven-and-a-half times his �1.3 million salary.
However, the bank is reportedly set to announce plans to cut pay by up to 30% for 24,000 employees at BarCap as it responds to outrage over bankers’ bonuses. Earnings for middle ranking and junior staff will be slashed.
And those hoping for a peek at Mr Diamond’s pay packet are likely to be disappointed, as the chief executive’s deal is not expected to be revealed until the annual report is published in mid-March.
The results come after weeks of conflict over bankers’ bonuses, in which Royal Bank of Scotland chief Stephen Hester turned down his �963,000 bonus amid mounting pressure and Lloyds boss Antonio Horta-Osorio waived his own payout following a leave of absence.
Barclays is expected to report pre-tax profits of �4.96 billion for 2011, compared with �6.1 billion the previous year, as its powerhouse investment arm Barclays Capital was hit by volatile market conditions.
In addition to wild swings on equity markets, Barclays and its rivals faced higher taxes, write-downs on eurozone debt, increased wholesale funding costs and regulatory changes.
Barclays shares are 26% lower than a year ago because of market turbulence, driven by increasing global recession fears, but this compares to the 50% fall in Lloyds’ share price and the 35% drop at RBS.
Robert Law, senior banks analyst at Nomura, has forecast pre-tax profits of �5.8 billion, ahead of consensus, and said Barclays was a preferred investment to its part-nationalised rivals Lloyds and RBS.
He said: “Of the domestic banking groups, Barclays has the least restructuring of its traditional banking operations to undertake and consequently there is least risk from these areas - but it is the most exposed to the structural pressures on capital markets.”
US banks, including Goldman Sachs, Citigroup and JP Morgan, last month reported a plunge in revenues amid turmoil in the eurozone.
Meanwhile, banks have flagged increasing cost pressures as rules put in place to protect against future financial crises make it harder for them to generate the high returns investors demand.
Elsewhere, the City will be looking for guidance on how the bank plans to accommodate the recommendations put forward by the Government-appointed Independent Commission on Banking (ICB).
The far-reaching shake-up of the sector includes ring-fencing banks’ high street divisions to protect them from riskier investment arms and setting aside more cash to cushion the blow of potential losses or future financial crises.
However, improvement at Barclays’ retail and business banking division and its credit card arm Barclaycard in the third quarter is set to continue.
Engine giant Rolls-Royce is in line to report profits in excess of �1 billion for the first time when it announces its annual results on Thursday.
The Derby and Bristol-based group is forecast to report pre-tax profits of �1.1 billion for the year to December 31, compared to �955 million the previous year.
Shares are 22% higher than a year ago, and have recovered 44% since a low in August, as the FTSE 100 company saw its order book grow as it received significant orders from Singapore Airlines, Norwegian Airlines and Emirates Airlines.
The company also secured an order from Asiana Airlines to supply six A380 superjumbos with its Trent 900 engine - the same model which exploded mid-air on a Qantas flight in 2010, prompting the carrier and several other airlines to ground their fleet.
Looking ahead, Rolls is likely to hail the positive impact of its acquisition of German engine maker Tognum and the �950 million sale of its stake in International Aero Engines.
Andrew Gollan, analyst at Investec, said: “We expect the tone to be relatively upbeat reflecting enthusiasm for the two major strategic deals in 2011. Trading themes to focus on include growth progression in civil aerospace and margin improvement in marine.”
The group also celebrated the entry into service of the first Boeing 787 Dreamliner, a lightweight craft operated by All Nippon Airways and powered by Rolls-Royce, which is more fuel efficient than other civil aerospace models.
The defence aerospace division has benefited from one-off contract termination settlements following the government’s Strategic Defence and Security Review by the Ministry of Defence and this was previously forecast to continue.
Rolls also launched the new Trent XWB engine, which it has agreed to supply on an exclusive basis to Airbus for its A350-1000 aircraft.
Struggling holidays firm Thomas Cook is expected to reveal more sales pain on Wednesday amid signs that rival TUI Travel has picked up some of its business.
Thomas Cook reportedly suffered a 33% decline in summer holiday sales in the first two weeks of 2012 as customers delayed their holiday plans amid uncertainty over the firm’s future prior to a �100 million lifeline from its banks.
The company rolled out a publicity drive with adverts in national newspapers reassuring customers that it was safe to book holidays despite fears of its collapse.
But TUI, which owns Thomson and First Choice holidays, was quick to capitalise on its rival’s woes by publishing its own adverts saying: “Another holiday company may be experiencing turbulence, but we are in really great shape.”
Although TUI chief executive Peter Long claimed the adverts were merely designed to “clarify” the difference between the two companies, he admitted that “if Thomas Cook lose volume, we are the natural beneficiary”.
Trading updates from the two travel giants will provide a clearer picture of whether Cook has succeeded in convincing consumers it is safe or if its misfortunes have merely played into the hands of its stronger competitor.
As well as an update on its performance, Thomas Cook may say whether it has made any progress in implementing its turnaround plan to focus on fewer and better quality hotels and a drive for more online bookings.
The company plans to sell �200 million of its assets over the next 18 months as part of its plans to take a chunk out of its debt mountain, which rose by 11% to �891 million in the year.
Its annual meeting to be held on the same day as the trading update will see three of Thomas’s non-executive directors - Peter Middleton, David Allvey and Bo Lerenius - step down.
Their departure has been seen as part of a move by new chairman Frank Meysman to sweep away the old regime ahead of a fundamental reform of the UK business.
Meanwhile, TUI, the UK’s largest tour operator, is expected to report widening losses in the three months to December 31 on Tuesday as it suffers a fall in demand for holidays in North Africa in the wake of the Arab Spring.
However, it has so far proved relatively resilient to the gloom, having reduced capacity to cope with the falling demand in the UK, while its markets in Canada and the Nordics have held up well.
In the UK, sales have been boosted by selling shorter breaks and more of its specialist packages, such as those that include meals or adult-only breaks.
Simon Champion, an analyst at Deutsche Bank, expects TUI to report losses of �113 million, up 31% on the previous year.
Drugs giant GlaxoSmithKline is set to book a healthy �8 billion profit on Tuesday despite a sluggish performance in its final quarter.
The economic malaise is expected to have impacted demand for its over-the-counter drugs such as Panadol painkillers and Gaviscon heartburn remedy.
The slowdown in sales growth of its consumer brands such as Lucozade, Ribena and Horlicks drinks is also forecast to continue as they come up against fierce competition in supermarkets.
Analysts expect a 1.3% rise in sales in final quarter, down on the 4% growth in the previous three months when strong sales of vaccines, such as a cervical cancer drug, helped it beat expectations.
Full-year sales are expected to be down 3% to �27.6 billion. But profits are forecast to rise 86% to �8.4 billion as it comes up against weak figures from the previous year when it paid out �4 billion in legal claims over the alleged side-effects of some of its drugs.
Glaxo is not expected to follow in the footsteps of rival AstraZeneca last week by reporting job cuts.
Like many of the big pharmaceuticals players, it faces problems introducing a pipeline of new blockbuster drugs to phase out those whose patents have expired, leaving them open to cheap competition.
But chief executive Andrew Witty recently said that as the company develops its drugs pipeline - with treatments for Parkinson’s disease, hepatitis C and asthma set to launch - sales should accelerate in 2012.
GlaxoSmithKline, the UK’s largest drug group, has nine treatments in late stage trials that are due to complete before the end of 2012 covering respiratory diseases, oncology, diabetes and HIV.
Guinness to Smirnoff drinks firm Diageo is expected to cheer strong profits growth on Thursday despite renewed pressure on sales in Europe.
The group’s performance in the UK has been hit by the widespread pub closures as more people buy cheaper alcohol from supermarkets where special offers drive down prices.
This, along with the economic woes in Ireland, has contributed to steep falls in Guinness sales - down 5% in the year to June.
Diageo is also exposed to several eurozone economies, such as Spain and Greece, which are suffering a hangover from the pre-recession debt binge, leading to a squeeze in consumer spending.
European sales were up 6% in the three months to September 30 after a 5% fall in the previous 12 months, but margins were under pressure as a result of the difficult consumer environment and there is doubt as to whether it can maintain this growth.
Diageo sells its drinks in 180 countries across the globe, giving it huge exposure to emerging markets, which is expected to buoy its results for the six months to December 31.
Its sales to Latin America and the Caribbean were up 30% in its last update, while sales to Asia Pacific were up 14%. It recently bought Mey Icki raki brand in Turkey and Meta Abo beer in Ethiopia as it looks to increase its exposure overseas.
Diageo, like many manufacturers, has been struggling with higher input costs in recent months but these are expected to have eased, which will help its profits going forward.
The City expects it to report sales up 7.6% to �5.7 billion in the six months to December 31, with a 9.6% rise in profits to �1.9 billion.
Martin Deboo, an analyst at Investec Securities, said “Diageo’s travails in the peripheral eurozone economies remain the key downside risk” to forecasts.